– And Why They Are Not Going Bankrupt! –
A Western Canadian friend of mine called me the other day asking about the financial situation of banks in Canada. Since he knew I was working in the industry, he wanted to know what was being whispered behind the thick walls of the vault. We receive so much conflicting information that people are completely lost. Since there is a US banks going bankrupt every day, people start panicking and wonder if Canadian banks could go bankrupt too!
I actually think that Canadian banks are good investment right now. I believe that they have been severely judged.
A different economic system
The major advantage (during an economic crisis) is to have a highly ruled environment. In fact, Canadian Banks have much more rules to follow than our fellow American bankers. There is a very small number of banks (7 chartered banks, 5 major banks in Canada) compared to the US (about 8,500 banks… and the number keeps going down 😉 ).
They obviously suffered losses during this crisis (all banks did), but they couldn’t expose themselves as other banks in other countries did. Where they smarter than other banks? I don’t think so, I think it’s only because they couldn’t take as much risk since they are ruled under a different system!
They are making good money
If you look at their financial statements, most Canadian banks are making considerable profit so far this year (except the CIBC who suffered a bigger loss considering the current situation). They are currently restricting their credit policies; increasing their interest rate on mortgages (most banks are increasing their variable rate mortgage policies). This means that they will have a better control over their loans and become more profitable over the long term. Due to the economic context, they had to increase their provision for bad accounts. Now that they are lending only to “good” clients, they will have to decrease their provision in the upcoming years. Fewer provisions equal more profit on balance sheet 😉
High paying dividend yield
A good company with a good cash flow is able to maintain a high paying dividend yield. This is exactly the case of Canadian Banks; they are offering 5 to 6% dividend yield right now. You can therefore buy those shares and wait patiently. Your investment won’t lose its intrinsic value and you will be fully protected against inflation. I believe it is also a good alternative for Smith Manoeuvre fans 😉
Then again, I must write a small disclaimer saying that The Financial Blogger cannot be held as responsible for any loss due to any of your transactions. This post is just reflecting my personal opinion and it is no where to be close to a recommendation. Make your own study and research and have fun in the stock market turmoil!
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